Tag Archives: investment advice

When to Leave Your Money in a Trust

scales of justiceMy Comments: Recently, two clients have asked me about asset protection and whether they should start thinking about a trust. The answer is maybe.

First, I have to remind everyone that I am not an attorney, and cannot advise people on legal matters. However, I can share basic knowledge that I’ve picked up over the years.

There are any number of reasons to think about asset protection. We live in a litigious society, and people find reasons to sue all over the place. If you think someone might sue you because your minor children got into a scrape, then certain assets you own could be at risk.

Certain kinds of trusts do offer asset protection, but in the State of Florida, there are tools you can use that allow you to retain control over those assets even while they are protected against the claims of creditors. I can help you explore those options, given my status as a financial advisor here in Florida.

By Joanne Cleaver / February 27, 2014 / US News & World Report

Not everything about the future is unknowable. Some family circumstances are all too predictable: divorce, disability and dumbfounding behavior.

Trusts can be a defense against these asset-shattering factors, estate lawyers say.

In the past, trusts have been the moat protecting the wealthy from estate taxes. But only about 0.3 percent of estates are likely to be hit with federal estate taxes, thanks to the high ceilings for such taxes ($5.34 million for single taxpayers and $10.68 million for married couples), says California lawyer Dennis Sandoval, who is also the director of education for the American Academy of Estate Planning Attorneys. Now, trusts are coming in handy as a first line of protection against illness and other potential complications.

“A trust gives you control and makes sure that the money is protected for the people you care about, and that it’s spent the way you’d like it to be spent,” says attorney Bernard Krooks, a specialist in elder law with Littman Krooks in New York.

Divorce. Sandoval estimates that more than 80 percent of the trusts he drafts are intended to protect an adult child’s inheritance in case that adult child divorces. The effort can be worthwhile for estates as low as several hundred thousand dollars, he says.

Continuing trusts, also known as “family access trusts,” protect the children’s inheritances. “It’s a relatively simple trust with the main purpose of keeping the child’s inheritance segregated and unavailable to a potential ex-spouse,” he explains.

Such trusts can also be used to ensure that a deceased spouse’s assets flow to his or her children, if the surviving spouse remarries (assuming there’s no prenuptial agreement). This is useful in second or third marriages in which one spouse is much younger than the other.

Disability and debilitation. A trust can extend protection for a disabled child or spouse, especially if the family wants to protect its assets from Medicaid payback provisions.

A special needs trust can wall off assets for a family member with chronic physical or mental needs and is especially valuable when planned well in advance with a trustee who understands the family’s intentions for caring for their loved one, both Sandoval and Krooks say. It’s important for the trustee to be fully conversant in the circumstances of the dependent family member. It’s also important to understand your intentions for leaving assets to others and know the rules of administering a special needs trust.

A “trust protector” is a third party who monitors the trust, providing an additional layer of accountability for fulfilling the purpose of the trust. Of course, adding a trust protector might also add another layer of cost to administering the trust.

A special needs trust should be set up as part of an overall estate plan and is not the same thing as a living trust.

Dumbfounding behavior. Drug addiction. Dangerous credit habits, including bankruptcy. Dereliction of personal responsibility.

H. Clyde Farrell, an attorney with Farrell & Pak in Austin, Texas, has a solution for heirs who are unlikely to use their newly inherited assets wisely: a trust, backed up by a contingent trust directive in the will.

“I recommend providing for contingent trusts that may apply to any beneficiary at the time of death, even if no trust would be needed as of the time the will or living trust is drafted,” Farrell says.

As it implies, a contingent trust is created when a certain theoretical situation becomes a reality. For instance, Farrell explains, if a beneficiary declares bankruptcy within 180 days before the death of the parent, a will including a clause for a contingent trust may be triggered, thus protecting the family assets from creditors.

Similar contingencies could be set up for drug abuse (no clean drug test, no money) and for those with chronic credit problems.

Do you want to prod your beneficiary to clean up his or her act? An “incentive trust” is your big stick from beyond the grave, Sandoval says. As one would guess, this type of trust rewards specific behavior, such as earning a college degree or taking time off work to care for a dependent.

Tightly drawn directives leave very little wiggle room for either an heir or a trustee to invoke a judgment call, should circumstances change. “In my experience, it is not the contingencies that lead to disagreement, it is whether particular discretionary distributions should be made,” Farrell says.

When trustees and beneficiaries disagree about the letter or intent of contingencies, or other elements of a trust, disputes can escalate. The very nature of contingent trusts tends to invite disputes, Farrell says, because the trusts rely on the “broad discretion” of the trustees. Usually, the disputes center around differing definitions of what is “reasonable” in terms of distributions, he says.

In Farrell’s experience, a trust is only as good as the trustee, who must exercise discretion and common sense to fulfill the intent of the trust.

3 Ill-Advised Reasons Not to Buy Life Insurance

workplace-safety-1926My Comments: I first became licensed to sell life insurance in 1976. Over the years, I’ve sold many policies, of all kinds, to all manner of people. Some of those clients have since died, though most have not. The skills and ability to help identify a problem and find a solution for that potential problem have allowed me to live a good life with my wife and children.

An story that resonates with this article came about sometime in the late 70’s. I was visiting a small company in Lake City where I had become known and trusted by the owners. An employee, whose name I now cannot recall, asked to speak with me. He had married recently and with a child on the way, wanted to talk about life insurance. So we did. I had my rate book me with and even an application, but he didn’t have the $12 needed to submit with the application for $100,000 of term life insurance. I promised to come back next week.

On Monday I called to find out which day would be best for me to drive up to Lake City. I was told by the business owner there was a problem. It seems the employee had been horseback riding that weekend. At one point, while riding through the woods, he attempted to take his horse around the right side of a tree while the horse decided the left side would be better. The net effect was a collision with the tree, and the young man tragically died.

For lack of $12, his wife and as yet unborn child did not get $100,000 to help recover, at least financially, from the accident. And 30 plus years ago, that was a lot of money,

By Geoff Williams February 27, 2014 12:30 PM

The television commercials urging the public to buy life insurance may be self-serving and manipulative, featuring sad, middle-aged women who look pained that their dearly departed husband didn’t take out life insurance. But that doesn’t mean those ads aren’t right.

It’s easy to see why life insurance caught on. It’s been around practically forever, since ancient Rome, but it really began gaining popularity during the 1800s. Back then, your life might easily be cut short because of cholera or smallpox. Or your lantern might burn down your home. There were cattle stampedes. You might be blown to bits during the Civil War.

While our life expectancy and safety issues have vastly improved, plenty of people still don’t buy life insurance, according to some surveys. For instance, a recent New York Life survey of 1,000 Americans ages 37 to 48 showed that 20 percent of Generation X households don’t have a life insurance policy.

Granted, you might not need life insurance. The main rule of thumb is if nobody will be financially devastated by your death, it isn’t a must-have. But not everyone goes by the rule of thumb. Here are some common reasons people don’t buy life insurance. If this sounds like you, you may want to reconsider.

If I check out early, I have plenty of assets that will take care of my family. There is logic to that — if you have a million dollars squirreled away and a will, who needs life insurance? But it can still be a risk to go without. Marc Renson, a 43-year-old who owns Ambition Coffee & Eatery in Schenectady, N.Y., wishes his father had bought some.

His dad had said, “I don’t need life insurance,” to which his son quips: “He was right. He didn’t need life insurance, but his family did.”

Renson describes his father as a serial entrepreneur, often opening businesses like arcades and an auction house, then starting something else. In 1984, his dad bought a sawmill operation and a few years later, purchased a new, bigger sawmill for $600,000 as well as timbering equipment and five acres of land. It was a $1.1 million investment.

“Then he fell asleep behind the wheel of his car and was killed,” says Renson, who was a few months away from graduating high school. His dad, who died in 1989, was 47.

There were a lot of assets, but Renson’s father left them a startup sawmill business the family hated operating and didn’t fully know how to manage. “Running chainsaws, cutting down trees, pulling them out of the woods, operating tractors, driving dump trucks — all to get these trees to the little sawmill and produce lumber that we would go and custom-make sheds for customers,” Renson says.

His family had been rich, Renson says, but within a year, his mother declared bankruptcy and moved into a low-income, two-bedroom apartment. Renson’s mother is 70 and doing well now, he says, but a life insurance policy would have saved her a lot of financial agony.

“I remember once instance in ’91 when my mother was let go from her third job at a hotel,” Renson says. “They downsized and didn’t need her position. She sat crying on the sofa wondering how she was going to finish paying my $1,500 tuition.”

I’m healthy. I’ve been wasting my money on life insurance. Aaron Endré, 27, owns a public relations and marketing firm in San Francisco. His mother, a homemaker who lived in Naples, Fla., died two years ago of colon cancer at age 52.

“She had life insurance her whole life but let it lapse, thinking that she was healthy, just before she was diagnosed with stage 3 cancer,” Endré says.

Endré and his mother never discussed the fact that she let her policy lapse. Endré imagines, however, that she felt terrible about it. “I distinctly remember my mom telling me throughout my life that I would be covered in case anything should happen to her or my stepdad,” he says.

I realize life insurance is important. I’ll get it pretty soon. That was what Grant Smith was thinking. But he didn’t get it soon enough.

Smith is 36 and lives in Atlanta. He and his wife, Alison, have a 2-month-old son. And Smith is fighting extensive small cell lung cancer.

Smith first started thinking about buying life insurance when he began receiving advertisements in the mail from the Gerber Life Insurance Company. But he was busy with his business, applianceart.com, which he started about three years ago. He also got married in July 2013, and in August, he bought a house.
A few weeks later, Smith began coughing up blood at the grocery store.

On Sept. 1, a doctor told him he had cancer. “I thought he was kidding,” he says.

Smith’s prognosis is dire. Chemotherapy is no longer working, so Smith is now participating in clinical trials in New York City. He has been talking to an estate planner and doing what he can to fund his son’s college education, including starting a campaign on a crowd sourcing site for fundraising, rockethub.com.

If things don’t go well with the clinical trials and a few drug therapy options doctors have discussed, Smith says, he might only be around another three or four months.

“Like any other small business owner, the American dream was to build this company into something that I could sell someday. That was kind of the plan,” Smith says. As for his wife and son’s prospects, he says she has a full-time job, “and I have this company, which I don’t know what to do with.”

Smith adds, “It’s not easy at my age that I don’t have much to leave behind, and it hurts my ego. I find it emasculating to be a provider and not leave anything behind.”

Which is why he is now a fan of life insurance.

While a lot of people undoubtedly put off buying life insurance because of the cost — which can be a few hundred to a thousand dollars a year, depending on the policy and the person’s age — Smith says he realizes it is a bargain compared to other family-related expenses.

“I think life insurance should be purchased for a family before birth,” Smith says. “There’s so much leading up to the birth, though, that you can get wrapped up in, with what kind of stroller to buy and swaddling and the nursery graphics for the wall.”

But his son, Smith says, isn’t going to remember what the colors of his bedroom wall were.

Thought For The Week – March 5, 2014

My Comments: From time to time I’ve posted a article from an associate of mine in Southern California whose life for the past 40 years has involved life and health insurance, not unlike mine. He sends me his weekly newsletter from which this comes.

By Gene Pasutla, Westland Financial Services, Inc.

For the past week now I have been participating in a discussion on a LinkedIn interest group on the legitimacy of suggesting that a client purchase life insurance on his/her parents. When they die, the client will receive a huge lump sum that can go far in enhancing their own retirement. Many of the participants expressed disapproval of someone actively trying to benefit from their parents demise. I have my thoughts on that, but am not interested in discussing the morality of it.

What does interest me, however, is the financial planning values associated with insuring ones parents. Look at any insurance illustration and you can see the predictable rate of return generated by “investing” in premiums for a policy on a healthy senior’s life. The only unknown is when the person will die so that the actual ROR (return on investment) can be calculated.

No one objects to receiving an inheritance. No one objects to parents investing money to grow that inheritance. Investing in insurance that grows the inheritance definitely has merit. And for sure, it is a good idea to protect the inheritance by using life insurance to pay for long-term care costs or for estate transfer costs.

I have had a large insurance policy on my mother for many years. It can be tapped to pay long-term care cost if she needs it, or it will pay a respectable return to me if she doesn’t. The bottom line, my sister and I have not had to worry about paying to take care of Mom should the worst happen. Mom is 91 now and each year she lives is a joy. The fact that my rate of return on her policy is going down is a small price to pay for having her with us that much longer. Another example of how life insurance is a win-win.

( Gene included an illustration of the coverage he has on his mother with his post. I did not include it here, but if you would like to have a copy, I saved it and will forwad it to you by email if you ask me. It needs some explanation for those of you not familiar with insurance company terms. – TK )

You Can Thank Ben Bernanke for 100% of the Stock Market Gains Since 2009

080519_USEconomy1My Comments: I’ve been a supporter of the PPACA or if you prefer, ObamaCare, since the beginning. My belief in it is based on the trend in place where health care costs consumed an ever increasing share of our national GDP and sooner or later would come a sticky end. Whether the PPACA solves the problem remains to be seen but a remedy had to be found.

The same is true of entitlement programs, as talked about here. What is lost, however, is the role to be played by demographics. As the baby boomers, those born between 1946 and 1964 leave the scene, there will be a relative lull in those needing these programs, leading to a counter argument in favor of entitlements.

But for now, the writing on the wall is pretty clear. It’s how we respond to the pressure that will ultimately tell the story.

Robert Lenzner, Forbes Staff

Here is the most important factual find about the stock market I’ve learned for some
many years: More than 100% of equity market gains since January 2009 have taken
place during the weeks the Fed purchased Treasury bonds and mortgages.

And conversely, during the weeks when the Fed did NOT buy Treasuries or mortgage
backed bonds, the stock market declined. Can you beat that? Credit to Michael
Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan
Asset Management, for that extraordinary discovery.

Stunning, isn’t it, that you owe outgoing Fed chairman Ben Bernanke for making you
whole on your portfolio since the Great Recession ended. Get down on your knees
tonight and pray that his successor, Janet Yellen, will need to keep purchasing bonds
and mortgage securities to keep interest rates low and asset prices moving higher. That’s the short-term blessing that realistically must be phased out sooner or later. Maybe later as a result of the debt ceiling crisis we just experienced and its ramifications for the U.S. economy.

Longer term we face the ultimate test as the cost of entitlements is at an all-time high in relation to non-defense discretionary spending, which includes education,
infrastructure, energy, R&D, law enforcement and a wide number of exceptionally
important programs necessary for the nation’s well-being. That fiscal time bomb is
coming sooner or later. We must do something before mandatory programs require
100% of government revenues.

Here’s J.P. Morgan’s wise boss of investment management on his prediction of the
“grand bargain” required in the next 3-5 years, ie, not while Barack is president. Better mull this over. Cembalest believes the tax base will be broadened to raise revenues by having a “means-tested limitation on the ability to deduct mortgage interest, state/local taxes, charitable contributions and perhaps a modest tax on municipal bonds in exchange for some kind of effective curtailments in the entitlement system.”

I say the battle over this “grand bargain” will not be considered “grand” by anyone and cause ever so much more distemper and political uproar than we have seen in many decades. Just today, Christopher Wood of CLSA Securities wrote in his weekly
comments (GREED & fear) that “there remains a fundamental ideological divide in
American politics.” He calls the internal dynamics of the Republican Party “an overt civil war.” What will Wood call the war over entitlement reform that is mandatory sooner or later?

I was disappointed that Wood, a believer in gold for over a decade, has proclaimed that “the end result of zero interest rate policy and quanto easing will be the end of the fiat paper monetary system as currently constituted, and quite possibly also the end with it of the US dollar’s reserve currency status.”

Between Cembalest and Wood, then, we have some years to get our finances in order. The next next debt ceiling deadline is now believed to be in the June-July 2014 period. The best possible scenario for the stock market would be some solid QE buying of bonds and mortgages through the summer of 2014. Don’t fight the Fed as the stock market depends on the odds that Janet Yellen will continue the policies of Ben Bernanke.

SP500+QE

Three Key Strategies for Helping Clients Navigate Aging Plans

retirement_roadMy Comments: OK, we’re all getting on in years, some of us more so than others. Baby boomers are starting to ask compelling questions about Social Security, about health care issues, and dozens of other topics that a 30 year old cannot yet start to think about. That’s OK; I couldn’t either when I was 31 and our son was first on the scene.

This came to me from an attorney friend who from time to time forwards interesting comments about the law and the issues faced by those of us who can and should now think about this stuff.

It’s a good start for someone as they start coming to terms with their mortality.

Acknowledgement goes to Louis Pierro, Esq., founder and principal of Pierro Law Group, LLC, for the content of this newsletter.

Many of your clients are baby boomers (now ages 50-68) moving into retirement and dealing with all the issues related to aging: elderly parents, kids in college, saving enough to last a lifetime and protecting what they have. With a dizzying array of financial instruments to choose from, complex federal and state laws governing estates, and the crisis in health and long-term care, your clients need your help more than ever to develop an effective plan for their senior years.

By 2050, the U.S. Census Bureau predicts there will be 86.7 million citizens age 65 and older living in the U.S., and they will comprise 21% of the total population. It predicts the number of people in the 65 and older age group will grow by 147% between 2000 and 2050, compared to 49% growth in the population as whole.

Waiting to plan for the “golden years” is no longer a viable option. Your clients need to look far into the future and develop an estate plan that will help them maintain their desired lifestyle and protect assets from a variety of risks, including the rising costs of care. We have identified three key strategies that can help your clients navigate the minefield of aging, and focus on a successful retirement.

Establishing Future Cash Flow and Determining Adequate Resources

The number one long-term concern of most clients is running out of cash as they age. No one wants to outlive their assets, but without pre-planning that could easily happen, especially if there is a medical crisis or chronic illness. Clients need to take care of themselves first, ensuring their income throughout retirement before worrying about the distribution of their estate. On an airliner, passengers are instructed that if the yellow oxygen masks drop, they must first put their own mask on and only then assist others. Only when your client is breathing comfortably about the future can plans be made to transition wealth to beneficiaries.

Having a list of questions to ask your clients at the beginning of a discussion about their estate plan will help establish the outline and direction of the plan. Some of the basic questions to ask are:
· What are your sources of income in retirement, and if married, do they continue for your spouse?
· Do you plan to stay in your current home?
· If so, do you have enough funds to do that?
· If not, where do you plan/want to live?
· Will you have any dependents living with you (parents, special needs children)?
· What would put your plan at risk?
· What about a medical crisis?
· Who will take care of you?
· How will you pay for it?

Answering these questions gives both you and your client a starting place to discuss creating the right estate plan. It is also an excellent place for financial advisors and estate planning attorneys to work together to ensure that income and assets are properly structured and protected.

Regular Planning for Tax Liabilities and Protecting Assets
With the increased focus on income tax issues, CPAs are integral in capturing business opportunities to help clients protect their assets, smoothly transition estates and reduce tax liabilities. It used to be that tax laws didn’t change very often, and established estate plans didn’t need to change year over year. However, since 2000 the federal estate and gift tax exemptions have changed almost yearly. Other federal and state laws governing income, estate and gift taxes have changed as well, with increased income and capital gains tax rates imposed on January 1, 2013.

While on the surface it appears that we have entered a period of stability, at least for federal estate and gift taxes, given their history and the federal deficit, it seems likely that the tax laws are only going to get more complicated, burdensome and complex. Diligent advisors offer guidance and educate clients regularly about any changes to the laws that could impact their estate plans and tax liabilities, and “best practices” include a team approach.

What a client might need in an estate plan when they are in their 50s and 60s can be very different from what they need in their 80s and 90s. Although accountants and financial advisors meet regularly with clients, most attorneys do not. As laws governing Revocable and Irrevocable Trusts, taxes, Medicaid, VA benefits and health care change over time, and your client has personal changes that could seriously jeopardize his or her estate plan, ongoing counseling is required. For estate planners, setting up an annual maintenance program with your clients, and working with an interdisciplinary team that includes a financial planner, CPA and attorney, keeps you up to date on best practices and ensures that your clients’ estate plans are current.

Planning for Medical Crises and Long-Term Care

No one plans to have a medical crisis, but without a solid estate plan in place before a crisis happens, a medical issue can destroy financial security in short order. The need for long-term care is a looming prospect that gets ever harder to deal with as clients age, with uncovered long-term care exposure creating an insolvency risk for most seniors. With Medicare all but out of the long-term care (LTC) space, and LTC costs escalating, for 95% of the retiring population the greatest risk to financial security is uncovered medical expenses. People are living longer, and often those added years are unhealthy. Consequently, the “elephant in the living room” for retirees is paying for medical care without exhausting assets.

A Long-Term Care insurance policy is still the best weapon against a financial disaster caused by a chronic illness or aging. Such policies are not accessible to everyone, however, due to cost, pre-existing conditions and other circumstances. LTC coverage is not guaranteed available by the Affordable Care Act or any other legislation. Moreover, although premiums are “level” they are not fixed, and careful planning is required to tailor coverage and premium to fit the client’s plan. Those able to afford the premiums are well advised to purchase a policy for needed coverage. The cost of assisted living and nursing home care is skyrocketing, and without an LTC plan, a client can be faced with losing all assets acquired through his or her lifetime. Often, for those uninsured, the burden of care falls on a loved one, and because of the complexities and pitfalls of Medicaid, such as the 5 year look-back and penalty provisions, paying privately can result in complete impoverishment.

There are many LTC products and options to choose from, like traditional LTC insurance, LTC/life insurance hybrids or life insurance with an LTC rider. You can help your clients find one that fits their needs and enhance your position as one of their trusted advisors – one who helps plan effectively without a focus on selling products, but rather implementing a plan. With increased volatility in the LTCI markets, carrier issues and rising premiums, it is imperative that LTC policies be reviewed regularly and that the policy fine print is understood. When your client is most vulnerable or unable to manage his or her affairs is not the time to find out that a LTC policy has a problem!

What if your client can’t afford the LTC premiums or has been denied coverage? Without an LTC insurance plan, it is even more important to consult with an attorney on other ways to protect assets from the poverty requirements of Medicaid and the Veterans Administration. An attorney can construct a plan to create a Medicaid Asset Protection Trust or Veterans Asset Protection Trust, as well as make plans to protect the estate, even if home care, assisted living or nursing home care becomes necessary. The collaboration between LTC insurance agents and attorneys is key, and the opportunities for mutual referral and joint marketing are abundant.

Summary: Identifying the Need to Plan Now Rather than Later
As our clients grow older, their medical, financial and legal needs change. For many, instead of worrying about growing their net worth, the new worry is not running out of money before they die. Working in tandem with an interdisciplinary team of professionals — financial planner, accountant and attorney — provides the expertise needed to create strategic estate plans for your clients.

In spite of deep experience in their field, no member of the advisor team, whether CPA or financial advisor or attorney, can know all the nuances of estate planning. Each brings specialized expertise to the table.

By working together on behalf of the client, the combined knowledge of this interdisciplinary team provides the best possible planning options to protect the client’s estate into the future. And, each team member has the added benefit of gaining referral opportunities to continue to build their own businesses.

How Strong Is The Stock Market?

retirementMy Comments: For many years, more than I care to remember, I searched for wisdom from among the many magazines and more recently, the many emails that cross my desk on a daily basis. How and what was going to happen and how could I help my clients benefit from the insights that surely came my way?

Last week, the S&P500 hit a new high water mark. And since we are now in unchartered waters, what rocks, sandbars and whirlpools lurk in the shadows?

I don’t have a clue. All that wisdom imparted to me by those magazines and emails mean very little. All I can do is review the past and whenever possible, draw conclusions that will hopefully presage the future. The best thing I know to do is position yourself in such a way that folks smarter and wiser than we are assume a caretaker role, one that we can monitor and make changes when it’s obvious we and they were wrong,

By Chad Karnes / Feb. 27, 2014

The S&P made a new intraday all time high on Monday, 2/24, hitting 1,858. Although it couldn’t hold that level and sellers sent prices back below the all time closing high of 1,848 from January, the market’s strength is undeniable.

Or is it?

Real Strength
The S&P 500 is a market cap weighted index whose price is derived from a basket of 500 stocks within it. The change in its value is derived by adding up all the weighted changes of its 500 individual components. Multiplying a company’s change in price by its weight in the index gives its weighted change and thus effect on the overall Index.

The top three companies by weight in the S&P 500 are Apple (AAPL), Exxon Mobil (XOM), and Google (GOOG). Together these three companies make up 7.5% of the total S&P 500′s price. If they collectively move up 10%, the S&P would move up 0.75%.

On the flipside, the three smallest companies in the S&P 500 are Diamond Offshore Drilling (DO), AutoNation (AN), and Graham Holdings (GHC). Collectively, these three companies make up only 0.06% of the S&P 500. If they all doubled in price, the S&P would not even budge, only rising 0.06%.

80/20 Rule
Just 200 of the S&P 500 stocks make up 80% of the entire index’s value. The bottom 300 companies are essentially dominated by the larger market cap ones.

The above breakdown of the S&P 500 displays one of the key weaknesses of the S&P and most stock indices. They can be misleading.

The S&P just made a new all time high which on the surface seems like a great development but take a look at the chart below.

What the above chart shows is the number of S&P 500 stocks in an uptrend as measured by whether their price is above their 200 day moving average. Quite clearly this chart is not making new all time highs and in fact is in a downtrend, showing that less and less stocks in the S&P 500 are participating in the rally. 19% of companies in the S&P 500 are in downtrends, the most at any new S&P price high since the rally from 2009 began. More so, the declining trend in companies above their 200 day moving average is also a first as the market makes new high after new high.

In our 1/20 Technical Forecast, just as the markets were topping and on their way to a 6% pullback, I provided a similar chart along with other indicators and commentary for our subscribers with this warning:
“The % of stocks above their 50 day moving averages peaked in February and again in May along with new all time highs. Since then, the peaks have not shown as much participation and display a market that makes new all time highs, but on the backs of less and less stocks. A breakdown of 60% (of stocks above their 50 day) accompanied all the market pullbacks in 2013 and again will be a warning that a majority of stocks are nearing downtrends and a larger selloff is likely.”

A decline below 60% occurred later that week as the market was on its way to a 6% pullback.

The declining breadth (as the chart above shows) continues through today and helped us warn subscribers of the overall weakening trend in stocks, regardless what the broader index was suggesting. This development makes the markets more susceptible to a large pullback.

Implications
The broader index may be making new all time highs, but less and less of its components are. This means the market is being driven higher by fewer and fewer companies and solely by those companies with the biggest market caps that have the larger effects on the Indices.

These stocks will only be able to pull the market higher for so long as valuations and momentum eventually become too lofty for sustainability. The increased risk of a rising market on less and less support was foreshadowed with January’s 6% pullback.

A market that rises on less and less support is one that is very fragile as there are less companies to pick up the slack if one of the leaders goes out of favor. The declining trend in stocks above their moving averages (and new 52 week highs) also shows a market that is tiring.

Checking In On The 1929 Stock Market Parallel

Scary chart 1My Comments: The other day, on February 17th, I had a post that explained how today is NOT 1929 all over again. If you found that story, and this chart interesting, then here is a follow up. Hopefully, it will help you navigate the waters as they are flowing today in 2014.

Chris Ciovacco, Ciovacco Capital Management / Feb. 25, 2014

Houses Appreciate At Slower Rate

With the Federal Reserve tapering their bond-buying program, investors are looking for evidence of an improving economy. Given that mortgage rates are well off their recent lows, it is not surprising to see some slowing momentum in the housing market, which is exactly what the data showed Tuesday.

From Bloomberg:
The S&P/Case-Shiller index of property values in 20 cities rose 13.4 percent from December 2012 after increasing 13.7 percent in the year ended in November, the group said today in New York. It was the first deceleration since June. The gain matched the median estimate of 33 economists surveyed by Bloomberg. “The housing recovery continues, but perhaps not as vigorously as it did in the first half of last year,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. and the best forecaster of the home-price index during the past two years, according to Bloomberg calculations. “Even so, appreciation trends still look pretty good even though they may not be as strong as they were.”

Head-and-Shoulders Off Table

On February 11 we outlined a simple “don’t lose too much sleep” strategy for the scary 1929 parallel chart that has been making the rounds on Wall Street. The 1929-like scenario involved a pattern known as a head-and-shoulders top. Monday’s new intraday high in the S&P 500 pretty much put the head-and-shoulders scenario to bed, which for the most part negates the 1929 analogy for the S&P 500.

( If this topic interests you, then I encourage you to click HERE to get to the source article. There are a number of charts which are important for you to see. I could probably replicate them here but… If you’ve come this far, then click HERE to find the rest of the article and the charts. – TK )

Treading Water: Four Economic & Market Trends Likely to Continue in 2014

profit-loss-riskMy Comments: Understanding how markets work over time is a very helpful skill set if you are advising clients about their money. Especially if they are worried about where money will come from to pay their bills far into the future.

For many, the short term “noise” that comes from what one reads in papers and magazines, and hears on TV, greatly influences their day to day thinking about their concerns. And so there is a huge tendency to let emotions rule the day when in fact it should be rigorous analytical thought.

Here is today’s attempt to provide you with a bridge between the “noise” and a longer term basis for making rational decisions about your money.

By Russ Koesterich, CFA

Like stocks last week, economic fundamentals are treading water. Russ explains the economic and market trends that are likely to continue in coming months.

Though there was quite a bit of back-and-forth stock market movement last week as investors reacted to some mixed economic data and earnings reports, stocks ultimately finished the week little changed.

Like stocks, economic fundamentals are also treading water, and I see more of the same ahead. As I write in my new weekly commentary, I expect a number of key economic and market trends to continue in the coming months.

Low inflation. Last week’s January’s Consumer Price Index reading showed that inflation remains well contained. Two factors are helping to keep inflation contained and less volatile than in the past – soft wage growth and dampened oil price volatility. If wage growth stays soft, I don’t expect to see any near-term acceleration in inflation.

Low rates. Low inflation is good news for the economy, and for markets. It means that the Fed is under no immediate pressure to raise rates, and we expect short-term rates to remain low for the remainder of 2014 and into 2015.

Moderately higher market volatility. The VIX Index, a measure of U.S. stock market volatility, has fallen a bit since it spiked in early February, but it’s higher than it was at the start of the year.

Given the uncertainty surrounding the U.S. economy, the Fed’s tapering, and the still fragile environment in emerging markets, I expect the relatively higher levels of equity market volatility to persist. To be clear, I’m not forecasting unusually high levels of volatility; rather, I anticipate volatility will continue to rise from what have been unusually low levels. Specifically, I expect the VIX to head from its current level of just under 15 back toward its long-term average of around 20.

More M&A activity. Corporate deal activity has been on the rise in recent weeks. In a world of relatively slow growth, and fewer opportunities for organic growth, it’s no surprise that companies are willing to deploy cash – and in some cases rich stock valuations – to buy growth. The willingness to engage in mergers and acquisitions may also be a precursor to rising capital spending.

So what does this mean for investors? Low rates should support equity valuations and help keep long-term Treasury rates from rising too aggressively. In addition, higher levels of deal activity and higher capital spending levels also tend to act as tailwinds for equity markets. You can read more about my economic outlook in my latest Investment Directions monthly market commentary.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.

Social Security: Planning Tips by Age

SSA-image-2My Comments: I’m increasingly being asked by people to help answer their questions about Social Security. Here is a short overview of critical ages as you begin to think about retirement.

by: Paul Norr / Wednesday, February 19, 2014

There are many age-related financial and planning milestones that clients will encounter in their sixties. Here is a list of some of the common ones that you and your clients should keep in mind.

59 ½ – Penalty Goes Away
This is the age at which one can withdraw money from traditional IRAs, 401(k)s or similar retirement plans without restrictions and without an added 10% tax penalty. Withdrawals will still be taxed at normal tax rates. For most people, it is not wise to draw down retirement accounts at this relatively young age unless they have specific financial needs. Usually, the value of maintaining tax-preferred savings exceeds the benefit that may come from early spending.

60 – Survivors
This is the first year to collect a Social Security survivor benefit if a spouse or ex-spouse (if they were married for at least 10 years and never remarried) has died.

62 – Social Security – First Call
The earliest age that someone could collect Social Security retirement benefit. Most people should not file for benefits at this early age although certain spousal strategies may be an exception.

62 – Pension Alert
This is a common age at which pension benefits kick in. Pension features vary significantly from company to company or between industry and government. Encourage your clients to carefully evaluate the features of their pension today if they are fortunate enough to have one.

63 ½ – Bridge to Medicare
Not an official milestone but might be an important age for laid-off workers who are offered COBRA health care benefits. COBRA benefits typically last for 18 months and 65 is the age at which one can begin Medicare medical coverage. Therefore, 63 and a half is the earliest age at which , if one were laid off and covered by COBRA health care benefits, that COBRA benefits would provide a health care bridge all the way until they are eligible for Medicare.

65 – Medicare
Medicare eligibility age. Most people should sign up for Medicare benefits within a 7 month window around this birthday in order to avoid lifetime surcharges on Medicare benefits. There are a few exceptions to this requirement such as active employees who are still covered under a large employer health plan.

66 – Social Security Magic Age
Sixty-six is the ‘magic age’ for Social Security when many options become available. For most boomers, 66 is the official full retirement age . At this age a number of creative Social Security strategies for couples become available such as File and Suspend and Restricted Filing. If a client is second-guessing their decision to file for earlier benefits, 66 is also the first age at which they can suspend benefits in order to allow delayed retirement credits to build up.

70 – Social Security – Last Call
Don’t delay any longer. This is the age at which there is no additional benefit to delay filing for Social Security benefits. If a client has not filed for benefits yet, congratulate them. They have maximized their lifetime monthly Social Security benefit but encourage them to file immediately.

70½ – Required Distributions Ahead
Owners of retirement accounts such as IRAs, 401(k)s or other similar retirement plans are required to start taking specified required minimal distributions (RMDs) from these accounts when they turn seventy and a half. They actually have until the following April to make take the first year distribution. After that, each year’s distribution must be taken by Dec. 31 of that year.

The total required distribution is based on the total values of all of a person’s IRAs and retirement plans as of Dec. 31st of the earlier year. The total distribution may all be taken out of any one account or may be split among the accounts in any manner that one chooses.

The American Public’s Indifference to Foreign Affairs

My Comments: I am almost always amused by those who shout “Take Back America!”. But it’s not really amusing, is it? Take it back to when? Take it back from whom? Before women had the right to vote? When the average life expectancy was about age 50?

Many of us, who today are over 60 , decry the current state of the nation and conclude the good times are over and that the world is coming to an end. But if you could go back in time to when our grandparents were in their 60’s, they would argue that the good times were over and the world was coming to an end. It wasn’t, and it didn’t. The only thing that changed was the current definition of “normal”.

Unfortunately, for demographic reasons, there is an increasing number of people over 60. Which means there is by definition, more people voting who want to relive the past. And that’s not necessarily good for the rest of us. ( I’m not afraid of a different future, even though I will be forced to adapt as my remaining years flow by.)

This article helps me understand what I’ve just described as it relates to our role in the world today.

By George Friedman / Tuesday, February 18, 2014

Last week, several events took place that were important to their respective regions and potentially to the world. Russian government officials suggested turning Ukraine into a federation, following weeks of renewed demonstrations in Kiev. The Venezuelan government was confronted with violent and deadly protests. Kazakhstan experienced a financial crisis that could have destabilized the economies of Central Asia. Russia and Egypt inked a significant arms deal. Right-wing groups in Europe continued their political gains.

Any of these events had the potential to affect the United States. At different times, lesser events have transfixed Americans. This week, Americans seemed to be indifferent to all of them. This may be part of a cycle that shapes American interest in public affairs. The decision to raise the debt ceiling, which in the last cycle gripped public attention, seemed to elicit a shrug.

The Primacy of Private Affairs

The United States was founded as a place where private affairs were intended to supersede public life. Public service was intended less as a profession than as a burden to be assumed as a matter of duty — hence the word “service.”

There is a feeling that Americans ought to be more involved in public affairs, and people in other countries are frequently shocked by how little Americans know about international affairs or even their own politics. In many European countries, the state is at the center of many of the activities that shape private life, but that is less true in the United States. The American public is often most active in public affairs when resisting the state’s attempts to increase its presence, as we saw with health care reform. When such matters appear settled, Americans tend to focus their energy on their private lives, pleasures and pains.

Of course, there are times when Americans are aroused not only to public affairs but also to foreign affairs. That is shaped by the degree to which these events are seen as affecting Americans’ own lives. There is nothing particularly American in this. People everywhere care more about things that affect them than things that don’t. People in European or Middle Eastern countries, where another country is just a two-hour drive away, are going to be more aware of foreign affairs. Still, they will be most concerned about the things that affect them. The French or Israelis are aware of public and foreign affairs not because they are more sophisticated than Americans, but because the state is more important in their lives, and foreign countries are much nearer to their homes. If asked about events far away, I find they are as uninterested and uninformed as Americans.

The United States’ geography, obviously, shapes American thinking about the world. The European Peninsula is crowded with peoples and nation-states. In a matter of hours you can find yourself in a country with a different language and religion and a history of recent war with your own. Americans can travel thousands of miles using their own language, experiencing the same culture and rarely a memory of war. Northwestern Europe is packed with countries. The northeastern United States is packed with states. Passing from the Netherlands to Germany is a linguistic, cultural change with historical memories. Traveling from Connecticut to New York is not. When Europeans speak of their knowledge of international affairs, their definition of international is far more immediate than that of Americans.

( If you want to jump to the source of this article, CLICK HERE. )

American interest is cyclical, heavily influenced by whether they are affected by what goes on. After 9/11, what happened in the Islamic world mattered a great deal. But even then, it went in cycles. The degree to which Americans are interested in Afghanistan — even if American soldiers are still in harm’s way — is limited. The war’s outcome is fairly clear, the impact on America seems somewhat negligible and the issues are arcane.

It’s not that Americans are disinterested in foreign affairs, it’s that their interest is finely calibrated. The issues must matter to Americans, so most issues must carry with them a potential threat. The outcome must be uncertain, and the issues must have a sufficient degree of clarity so that they can be understood and dealt with. Americans may turn out to have been wrong about these things in the long run, but at the time, an issue must fit these criteria. Afghanistan was once seen as dangerous to the United States, its outcome uncertain, the issues clear. In truth, Afghanistan may not have fit any of these criteria, but Americans believed it did, so they focused their attention and energy on the country accordingly.

Context is everything. During times of oil shortage, events in Venezuela might well have interested Americans much more than they did last week. During the Cold War, the left-wing government in Venezuela might have concerned Americans. But advancements in technology have increased oil and natural gas production in the United States. A left-wing government in Venezuela is simply another odd Latin government, and the events of last week are not worth worrying about. The context renders Venezuela a Venezuelan problem.

It is not that Americans are disengaged from the world, but rather that the world appears disengaged from them. At the heart of the matter is geography. The Americans, like the British before them, use the term “overseas” to denote foreign affairs. The American reality is that most important issues, aside from Canada and Mexico, take place across the ocean, and the ocean reasonably is seen as a barrier that renders these events part of a faraway realm. Terrorists can cross the oceans, as can nuclear weapons, and both can obliterate the barriers the oceans represent. But al Qaeda has not struck in a while, nuclear threats are not plausible at the moment, and things overseas simply don’t seem to matter.

Bearing Some Burdens

During the Cold War, Americans had a different mindset. They saw themselves in an existential struggle for survival with the communists. It was a swirling global battle that lasted decades. Virtually every country in the world had a U.S. and Soviet embassy, which battled each other for dominance. An event in Thailand or Bolivia engaged both governments and thus both publics. The threat of nuclear war was real, and conventional wars such as those in Korea and Vietnam were personal to Americans. I remember in elementary school being taught of the importance of the battle against communism in the Congo.

One thing that the end of the Cold War and the subsequent 20 years taught the United States was that the world mattered — a mindset that was as habitual as it was reflective of new realities. If the world mattered, then something must be done when it became imperiled. The result was covert and overt action designed to shape events to suit American interests, perceived and real. Starting in the late 1980s, the United States sent troops to Panama, Somalia, Bosnia, Kosovo and Kuwait. The American public was engaged in all of these for a variety of reasons, some of them good, some bad. Whatever the reasoning, there was a sense of clarity that demanded that something be done. After 9/11, the conviction that something be done turned into an obsession. But over the past 10 years, Americans’ sense of clarity has become much more murky, and their appetite for involvement has declined accordingly.

That decline occurred not only among the American public but also among American policymakers. During the Cold War and jihadist wars, covert and overt intervention became a standard response. More recently, the standards for justifying either type of intervention have become more exacting to policymakers. Syria was not a matter of indifference, but the situation lacked the clarity that justified intervention. The United States seemed poised to intervene and then declined. The American public saw it as avoiding another overseas entanglement with an outcome that could not be shaped by American power.

We see the same thing in Ukraine. The United States cannot abide a single power like Russia dominating Eurasia. That would create a power that could challenge the United States. There were times that the Ukrainian crisis would have immediately piqued American interest. While some elements of the U.S. government, particularly in the State Department, did get deeply involved, the American public remained generally indifferent.

From a geopolitical point of view, the future of Ukraine as European or Russian helps shape the future of Eurasia. But from the standpoint of the American public, the future is far off and susceptible to interference. (Americans have heard of many things that could have become a major threat — a few did, most didn’t.) They were prepared to bet that Ukraine’s future would not intersect with their lives. Ukraine matters more to Europeans than to Americans, and the United States’ ability to really shape events is limited. It is far from clear what the issues are from an American point of view.

This is disconcerting from the standpoint of those who live outside the United States. They experienced the United States through the Cold War, the Clinton years and the post-9/11 era. The United States was deeply involved in everything. The world got used to that. Today, government officials are setting much higher standards for involvement, though not as high as those set by the American public. The constant presence of American power shaping regions far away to prevent the emergence of a threat, whether communist or Islamist, is declining. I spoke to a foreign diplomat who insisted the United States was weakening. I tried to explain that it is not weakness that dictates disengagement but indifference. He couldn’t accept the idea that the United States has entered a period in which it really doesn’t care what happens to his country. I refined that by saying that there are those in Washington that do care, but that it is their profession to care. The rest of the country doesn’t see that it matters to them. The diplomat had lived in a time when everything mattered and all problems required an American position. American indifference is the most startling thing in the world for him.

This was the position of American isolationists of the early 20th century. (“Isolationist” admittedly was an extremely bad term, just as the alternative “internationalist” was a misleading phrase). The isolationists opposed involvement in Europe during World War II for a number of reasons. They felt that the European problem was European and that the Anglo-French alliance could cope with Germany. They did not see how U.S. intervention would bring enough power to bear to make a significant difference. They observed that sending a million men to France in World War I did not produce a permanently satisfactory outcome. The isolationists were willing to be involved in Asia, as is normally forgotten, but not in Europe.

I would not have been an isolationist, yet it is hard to see how an early American intervention would have changed the shape of the European war. France did not collapse because it was outnumbered. After France’s collapse, it was unclear how much more the United States could have done for Britain than it did. The kinds of massive intervention that would have been necessary to change the early course of the war were impossible. It would have taken years of full mobilization to be practical, and who expected France to collapse in six weeks? Stalin was certainly surprised.

The isolationist period was followed, of course, by the war and the willingness of the United States to “pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty,” in the words of John F. Kennedy. Until very recently, that sweeping statement was emblematic of U.S. foreign policy since 1941.

The current public indifference to foreign policy reflects that shift. But Washington’s emerging foreign policy is not the systematic foreign policy of the pre-World War II period. It is an instrumental position, which can adapt to new circumstances and will likely be changed not over the course of decades but over the course of years or months. Nevertheless, at this moment, public indifference to foreign policy and even domestic events is strong. The sense that private life matters more than public is intense, and that means that Americans are concerned with things that are deemed frivolous by foreigners, academics and others who make their living in public and foreign policy. They care about some things, but are not prepared to care about all things. Of course, this overthrows Kennedy’s pledge in its grandiosity and extremity, but not in its essence. Some burdens will be borne, so long as they serve American interests and not simply the interests of its allies.

Whether this sentiment is good or bad is debatable. To me, it is simply becoming a fact to be borne in mind. I would argue that it is a luxury, albeit a temporary one, conferred on Americans by geography. Americans might not be interested in the world, but the world is interested in Americans. Until this luxury comes to an end, the United States has ample assistant secretaries to give the impression that it cares. The United States will adjust to this period more easily than other governments, which expect the United States to be committed to undertaking any burden. That may come in the future. It won’t come now. But history and the world go on, even overseas.